About Me

greekdefaultwatch@gmail.com
Natural gas consultant by day, blogger on the Greek economy by night. Trained as an economist and political scientist. I believe in common sense and in data, and my aim is to offer insight written in language that is clear and convincing.

15 January 2006

Energy independence again

The New York Times writes, “America cannot win President Bush's much-vaunted war on terrorism as long as it is sending billions of dollars abroad for oil purchases every day. It cannot establish democracy in the Middle East because governments rich in oil revenue do not want democracy. And it will never have the geopolitical leverage it needs as long as it is dependent on unstable foreign sources for fuel.”

There is a beguiling simplicity in this line of thinking, which bemoans America’s energy dependence on the Middle East, Central Asia and other volatile regions, and which praises whatever efforts may bring the country closer to energy independence. Although based on the common-sense observation that less dependency is better, is offers nothing more than a desired end-point which magically solves America’s energy problem and the geopolitical predicaments which naturally emerge from it. Useful as such a destination may be, and however attractive and compelling the need to develop alternative sources of energy, it provides little guidance in thinking concretely and imaginatively about the transition to this energy independent future.

The intuition that guides such fantasies ignores the realities of the world energy market which prices oil as a single commodity, and which would increase the price of American-produced oil even if it were consumed domestically. This is the reality of whatever efforts of trying to make America self-sufficient in conventional sources of energy; but even if America were to rely increasingly on non-conventional sources, the affordability of these supplies would still depend on the overall energy equation, as it would be impacted by the market mechanism which would seek to equilibrate the prices of similar products. And despite the constant emphasis on the instability of the regions which provide the bulk of the oil consumed in world markets, it is through the price mechanism that whatever shortages are being registered, meaning that even if America were to acquire more secure energy supplies, it could only ameliorate but not eliminate its energy problem.

It is true, however, that a more self-sufficient America could reduce the amount of money that is transferred from American consumers to producers abroad. All the same, this reality has to be considered for its geopolitical rather than economic implications, because, however deplorable the fact that Americans are enriching Saudis, Iranians, Russians, and Venezuelans, it is the political implications of these countries having more money which interferes which the conduct of American foreign policy.

There are three broad ways one can think about this: the first is that America’s presumed disconnect from the world energy market (what energy independence means) will not necessarily spell a sharp reduction in prices, since the price of oil reflects current supply and demand, and it is still possible to conceive a scenario where investment decreases to the point that a sudden surge in demand increases prices considerably, enriching the producers that America would rather not enrich (which is what happened during the 1990s where investment plummeted and brought about a steep increase in prices).

A second reality comes from the threat of low oil prices. In January 2000, Amy Jaffe and Robert Manning wrote an article in Foreign Affairs called “The Shocks of a World of Cheap Oil,” which catalogued the political implications of low oil prices. And while our intuition may rush to think that their prognosis of a future where prices are low turned out to be acutely incorrect in the short-run, their underlying analysis is sound and relevant. What they argued was that the threat comes not only from high oil prices but low prices too: the Russian financial crisis was worsened by low oil prices; in Venezuela, Hugo Chavez came to power on the tide of political discontent which followed the oil crash in 1998; and the brewing of terrorism in the 1990s came during a time when oil prices were rather low and coincided with Saudi Arabia’s increasingly difficult in placating its restless population. Hence, if America were to become energy independent and produce a crisis in those countries which rely on energy exports for their livelihood, it is not at all clear that the end result would be vastly better in the aftermath.

A third implication of this anticipated freedom of action which would come from energy independence would be to alter the American attitude towards the energy-rich Persian Gulf. For those who think that oil and terrorism go hand in hand and who cannot imagine anything less fortunate than the policy bargain that America has struck in the region, it is worth pondering the effects of an American retreat from the region. Countries which would fall behind America in making this transition to cleaner fuels would assume a more active role in the region, engaging with the countries there as to ensure that their own energy supplies are safe. China and India are obvious examples of countries that could try to meddle more aggressively in regional politics, though the European Union and Japan, often assumed to be free riders and the beneficiaries of America’s strategic posture in the region, could seek their own ways to connect their foreign policies with the economic imperative of accessing oil and gas. What would come from this increased and varied attention is anyone’s guess, though it is not hard to imagine why the receding of one overwhelming power in the area could be substituted with more competition and possibly conflict between those who would take its place.

The overall sense that one gets from reading accounts such as that described in the Times editorial is that the urgency of a worthwhile goal produces an outpouring of imagination and wishful thinking about the transformation that such a move could mean for American foreign policy. Yet the attraction and constant calling for anything that make America energy independent reeks of isolationism, insofar as it reflects the belief that if America gets things right at home, it can somehow insulate itself from the troubles lying beyond its shores. No amount of oil trouble should lead someone to believe anything as simple as this.